Spotting Bubbles: A Two-Pillar Framework for Policy Makers

Bradley A. Jones ()
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Bradley A. Jones: International Monetary Fund, USA

Journal of Banking and Financial Economics, 2016, vol. 2, issue 6, 90-112

Abstract: In the aftermath of the global financial crisis, the issue of how best to identify speculative bubbles remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk, based on price behavior alone. In response, I introduce a twopillar (price and quantity) approach for financial market surveillance. While asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. Though policy makers will always encounter uncertainty when attempting to measure imbalances in financial markets, ‘perfect should not be the enemy of the good.’ In this spirit, the framework in this paper seems to capture some of the stylized facts of asset booms and busts, and thus could offer policy makers a practical guide as to when to consider leaning against the wind.

Keywords: asset bubbles; asset pricing; market effi ciency; macroprudential policy. (search for similar items in EconPapers)
JEL-codes: E44 F37 G12 G15 G18 (search for similar items in EconPapers)
Date: 2016
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